Global tax changes could impact Irish recovery

Near-term prospects for economy are favourable but a close eye needs to be kept on likely changes this year to the global corporate tax regime
Global tax changes could impact Irish recovery

Built-up household savings are expected to fuel a rebound in the domestic economy in the second half of this year.

Data coming in on the Irish economy for the opening quarter of 2021 show that the current lockdown is not having as big a negative impact on activity as the first shutdown in the spring of 2020.

All of manufacturing has remained open on this occasion. Part of the construction sector has remained open and is reopening further, meaning that the sector's decline has not been as severe as the collapse seen last year.

Core retail sales also declined in January and February, but again, by not as much as in the first lockdown. Sales were down by more than 11% in the first two months of 2021, but were still 24% above the nadir reached last spring.

Meanwhile, the cut in VAT helped support new car sales in early 2021.

More generally, the decline in the services sector in the first two months of this year was nowhere on the scale of the contraction seen last spring, while the sector picked up in March.

Firms have become better able to adapt to lockdowns, through remote working, online sales and home deliveries. 

All this has seen the unemployment rate, including those on the PUP, rise to 25% in the first quarter of 2021, compared to the high of 30% hit in the first lockdown last year.

The problem, though, is that while the downturn in this lockdown is not as deep as last year, it is lasting for a far longer period of time. 

Much of the services economy is likely to be in lockdown for five to six months until near mid-year, compared to two to three months during last spring and early summer.

The partial shutdown in construction has also lasted much longer on this occasion. Thus, while new housing completions held up in 2020, there are forecasts that they could decline by 15%-20% in 2021.

Growth forecasts for the Irish economy in 2021 have been quite upbeat, reflecting expectations of a strong rebound in the second half of the year.

The ESRI expects GDP growth of 4.4% this year. The IMF is forecasting GDP growth of 4.2% for Ireland in 2021. 

The Central Bank is even more bullish, forecasting GDP growth of 5.9%, with GNP up an astonishing 10.9%. 

The enormous build-up of household savings points to considerable firepower to fuel a strong rebound in the domestic economy, while the global economy is starting to recover.

The near-term prospects for the Irish economy look quite favourable. A close eye, though, needs to be kept on likely changes this year to the global corporate tax regime, which could impact the medium-term growth prospects for small, open economies like Ireland.

  • Oliver Mangan is chief economist with AIB

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